Investing, Asset Allocation, Economics & the Search for the Bottom Line

Strategic Briefing | 2.29.12 | Politics & Economic Stimulus

Stimulus Is Maligned, but Options Were FewThe New York Times | Feb 29
Britain — which has its own currency and enjoys low interest rates — offers perhaps the best parallel to the United States. In 2010 the coalition government of David Cameron came into office promising to undo the stimulus policies of its predecessor. It cut spending across the board, asking government departments to slash budgets by 25 to 40 percent. And it shot Britain’s incipient economic recovery in the foot. By the end of last year the British economy was still 4 percent smaller than it was before the recession started four years earlier. And it is expected to contract a little more this year. Even after budget cuts, the government’s debt is bigger, compared with the size of the economy, than when Mr. Cameron took office. By comparison, despite criticism of its size and composition by both the right and the left, the stimulus by the Obama administration did add to jobs and growth. The nonpartisan Congressional Budget Office estimates it will have contributed at least 1.6 million jobs and perhaps as many as 8.4 million by 2013.

Partisans ignoring stimulus’s successJuan Williams (The Hill) | Feb 27
The upcoming presidential election is likely to be a debate about the value of the stimulus.Auto Bailout Now Backed, Stimulus DivisivePew Research Center | Feb 23
Public support for government loans to major U.S. automakers are viewed more positively today than in the fall of 2009, but there has been less change in opinions about other major economic policies such as the federal loans to banks and financial institutions during the 2008 financial crisis and President Obama’s economic stimulus plan.The stimulus plan that Romney forgotSalon | Feb 27
As governor, Romney proposed more than $700 million in economic stimulus in a pair of packages over three years to right a sickly state economy that shed thousands of jobs before he took office, including offering to hand employers $30,000 for each worker they hired, even though he now bashes his Republican and Democratic foes over wasteful government spending.The Secret Romer Stimulus MemoJonathan Chait (New York Magazine) | Feb 22
The largest question looming over Barack Obama’s presidency is what would have happened if he tried to push for a larger economic stimulus at the outset. Could he have gotten it passed? Did he think his plan was truly big enough, or just the biggest one he could pass? In answer to that question, Noam Scheiber has acquired a major piece of the puzzle. While reporting his new book, The Escape Artists, which chronicles the administration’s response to the crisis, he got his hands on the fabled original version of Obama’s economic team’s 2008 memo, sort of the economic policy equivalent of the Blade Runner original cut. In the first version, Romer argues that a $1.8 trillion stimulus would be needed to fill in the anticipated output gap (which, in any case, turned out to be larger than anybody knew at the time.) But Larry Summers considered that figure unrealistically high — they would be laughed at by the political team — so the memo that reached Obama’s desk described an $850 billion stimulus as the largest possible option.Third-Year Anniversary of $787B Stimulus Scores a Grave MilestoneThe New American | Feb 21
Last Friday marked the third-year anniversary of President Obama’s $787-billion economic “stimulus” law — and it scored a rather grim milestone: The unemployment rate held steady above eight percent for 36 months, the longest period since World War II. In fact, according to the Bureau of Labor Statistics, the current 8.3-percent unemployment rate is precisely where it stood three years ago when the legislation, called the American Recovery and Reinvestment Act (ARRA), was signed into law. The previous record for above-8-percent unemployment was 27 months, which transpired in the early 1980s.Fact-Checking the Fact Checkers: Mitt Romney, President Obama, and the StimulusPeter Suderman (Reason) | Feb 21
The Washington Post’s Fact Checker column takes Mitt Romney to task for claiming that “three years ago, a newly elected President Obama told America that if Congress approved his plan to borrow nearly a trillion dollars, he would hold unemployment below 8 percent.” After all, it wasn’t President Obama who said this, but his economic advisers, and they didn’t even know that we actually needed roughly a zillion times more stimulus! Here’s the Post:

Far from being anything that Obama said, the Romney campaign acknowledges that this 8 percent figure comes from a staff-written projection issued Jan. 9, 2009 — before Obama had taken the oath of office.

…Romer, after she left the White House in 2010, said that the estimate of the impact of the stimulus bill was accurate but that the 8 percent “prediction was so far off” because economic conditions were so much worse.

“We, like virtually every other forecaster, failed to anticipate just how violent the recession would be in the absence of policy, and the degree to which the usual relationship between GDP [gross domestic product] and unemployment would break down,” Romer said.

The bottom line? The Bernstein-Romer report “was not an official government assessment or even an analysis of an actual plan that had passed Congress.” Three Pinocchios!Stimulus and EtiquetteProfessor John Cochrane (The Grumpy Economist) | Jan 19
Stimulus still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now, as typically happens after any event makes the news. Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don’t. Some of those models have huge holes in them (the standard IS LM model, which even Krugman admits is “ad hoc”). Some don’t. The rather mysterious “New Keynesian” stimulus models could use a lot of investigation (More in an upcoming post.) Even if stimulus works, when and for how long? A lot of models give more stimulus when interest rates are stuck at zero. But many advocates, like Krugman and Delong, want more government spending even for times and for countries (Greece) with high interest rates. Surely too much spending eventually leads to debt crises or strangling taxation, but when? (Then, advocates usually want inflation and devaluation, but that has a limit as well.) The facts are far from decisive. The right says: “The government spent like a drunken sailor and we still had an awful recession. Stimulus Failed” The left says “It would have been way worse without the stimulus.” History does not paint a clear picture either. GDP rose a lot along with Government spending at the beginning of WWII. GDP didn’t fall like a stone at the end of WWII. Economists are producing hundreds of papers and volumes of studies for us to sort through, which I’ll review in the future, but cause and effect will always be hard to tease out in economics.Survey of Economists On Effect Of Stimulus On UnemploymentBooth School of Business at the University of Chicago | Feb 15